45 things smart investors never say

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

1. Fear of political strife – “I don’t like the President”

2. Concentrated position – “My grandfather gave me this stock”

3. Impersonal benchmarks – “Why am I down versus the S&P 500?”

4. Market timing – “Is now a good time to invest?”

5. Home bias – “Europe? I prefer the Red, White, and Blue!”

6. Tangibility bias – “I like to invest in things that I can hold”

7. Friendship bias – “I like to invest in people I know”

8. Anchoring/ “breakevenitis” – “I’ll sell when it gets back to what I paid for it”

9. Selling winners too quickly – “You never go broke taking a profit”

10. Mere exposure effect – “Buy what you know”

11. Zero risk bias – “I’ll keep this dry powder for a rainy day”

12. Performance chasing – “This has been hot…”

13. IPO investing – “Have you heard of this new company…?”

14. Shifting risk tolerance – “I’m a high-risk high-reward person”

15. Ostrich effect – “Why mess with a good thing?” (complacency)

16. Confirmation bias – “All of my friends say…”

17. Overconfidence – “It won’t happen to me…”

18. Hindsight bias – “How did you do in 2008?”

19. Restraint bias – “I’ll jump on the next March 2009”

20. Self-serving bias – “Why aren’t my returns higher?” (two-way street)

21. Affect heuristic – “I’m going with my gut on this one…”

22. Appeal to authority – “But Jim Cramer said…”

23. Status quo bias – “Rebalance? Why bother?”

24. Hyperbolic discounting – “I’ll start saving later…”

25. Gambler’s fallacy – “I’m on a roll!”

26. Herding – “My friend told me to check out…”

27. New era thinking – “Yeah, but this time is different…”

28. Representativeness – “This will be the Great Depression all over again”

29. Bias blind spot – “But I would never do that!”

30. Ambiguity aversion – “Why can’t you just give me a straight answer?”

31. Babe Ruth Effect – “Why did you have me in last year’s big winner?”

32. Dread risk – “I’m gonna buy gold”/ “What about the zombie apocalypse?”

33. Fundamental attribution error – “Why aren’t you beating the market? I could do better myself!”

34. Illusory pattern recognition – “This chart looks just like 1929!”

35. Money illusion – “I’m a millionaire! What do you mean keep working?”

36. Myopic loss aversion – “Excuse me, I have to make some hedging trades.”

37. Sunk cost fallacy – “Well, we’ve already gone this far so…”

38. Turkey illusion – “Recession? Never heard of it.”

39. Fetish for complexity – “I need hedge fund exposure! What am I paying you for?”

40. Declinism – “The way I see it, the world is just going to hell”

41. Framing – “Save 10%? Impossible.”

42. Illusory truth effect (believing a market myth frequently repeat) – “Sell in May and go away”

43. Information bias – “Let me just turn on CNBC”

44. Outcome bias – “You told me not to buy individual stocks and it went up. Ha!”

45. Post-purchase rationalization – “I mean, I NEEDED that.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Earnings Season Upon Us, but Information Void Looms

Raupp_Podcast_GraphicJeff Raupp, CFA, Senior Investment Manager

On this week’s podcast (recorded August 1, 2016), Jeff covers the current themes impacting markets, including Brexit, earnings season, and the presidential election. Highlights of his discussion include:

  • Since the initial negative reaction from the Brexit vote in late June, markets have rebounded sharply, with U.S. stocks up over 15% since the June 27 lows and international stocks up over 10%.
  • Late summer and fall loom as somewhat of an information void, where economic data is a little sparser and investors have a harder time seeing the impetus for the next leg up in the market.
  • It wouldn’t be surprising to see a pause in the upward momentum in the markets until we get more clarity about the direction of the election.
  • This past week, housing, earnings, employment and wages all had positive reports, but were offset by a very disappointing GDP number.

For Jeff’s full insight, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Frontier Markets Still Attractive

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager & International Strategist

On this week’s podcast (recorded June 2, 2016), Stuart weighs in on frontier markets and how this space is still an attractive area for investors.

Quick take:

  • Today’s frontier markets closer to yesterday’s higher-growth emerging markets.
  • Frontier markets are different and may offer potentially higher growth prospects relative to re-emerging markets.
  • Frontier markets can offer potential positive benefits in portfolio diversification.
Source: MSCI, Blackrock

Source: MSCI, Blackrock

Source: MSCI, Blackrock

Source: MSCI, Blackrock

Frontier markets still offer investors the potential for higher returns and lower correlation within broadly diversified portfolios. Although emerging and frontier markets both offer younger populations and higher economic growth potential relative to developed markets, there are also key differences that currently favor frontier markets.

Frontier markets include a variety of countries that, in many cases, are more tied to domestic factors as opposed to global growth. Countries in Sub-Saharan Africa, such as Kenya and Nigeria, and in South Asia, such as Vietnam and Bangladesh, offer potential investment opportunities. Several of these markets are enacting structural reform and attracting foreign direct investment to improve economic growth prospects. While depressed oil prices have an impact on growth in Middle East economies, such as Oman and Qatar, these countries also boast higher incomes and strong population growth rates.

Source: MSCI, Blackrock

Source: MSCI, Blackrock

Source: MSCI, Blackrock

Source: MSCI, Blackrock

In contrast, emerging markets are more of a mixed bag. The larger BRICK economies (Brazil, Russia, India, China, South Korea) within emerging markets contain a spectrum of moderate growth to stagnation along with banking sectors hobbled by large and rising bad credit. Depressed commodity prices directly hurt Brazil and Russia, while a capacity glut in basic materials impacts bank loans in China and India. The question of “whither the BRICKs” is vital to the direction of emerging markets given they comprise over half of the index.[1]

Investing in frontier markets provides more exposure to domestic growth sectors whereas emerging markets are more geared toward industries influenced by global commodity exports. Domestic sectors account for three out of every four dollars in frontier markets, while they comprise only one out of every two dollars in emerging markets. Industry sectors related to global trends (in many cases commodities) comprise nearly half of emerging market companies but only a quarter of frontier markets.[2]

Frontier markets only comprise less than 3% of the world’s total market capitalization.[3]  Coupled with potentially faster growth relative to the developed world, further structural reform could propel further growth in capital markets.

Superior population growth is one supportive factor. Median population growth of 1.5% in Frontier markets exceeds growth in both developed and emerging markets.

2014 Median Compound Annual Population Growth
Frontier Markets 1.5%
Developed Markets 0.7%
Emerging Markets 0.9%

Source: World Bank and Brinker Capital

A growing variety of funds and ETFs have come to market and allowed greater access to investing in frontier markets in recent years. Nonetheless, frontier markets continue to offer potential benefits to diversifying investment portfolios. Even over the last five years, frontier markets still show lower correlation to broad equity indices (and even lower relative to emerging markets).

Please click here to listen to the full recording.

[1] BRICK comprises 54% of the MSCI Emerging Markets Free Index.  Source: MSCI and Blackrock.
[2] MSCI, Blackrock, and Brinker Capital
[3] Bloomberg and Brinker Capital

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

Investment Insights Podcast – Central Banks Back Economies

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 17, 2016), Bill explains why recession concerns should continue to lessen and what to expect from the upcoming earnings season:

What we like: Recent Wall Street Journal survey indicates that investors are becoming less fearful of a recession; that trend should continue as central banks across the world are firmly standing by their economies–Janet Yellen most recently

What we don’t like: Second quarter earnings season likely to have residual effects from the weak first quarter; markets may trend sideways for a time; corporations have been the largest buyers of stock but have to step aside during earnings season

What we’re doing about it: Continuing to look for opportunities within high-yield, energy and natural resources

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

New Years Resolutions for Investors

Sue BerginSue Bergin, President, S Bergin Communications

  1. I will not try to control the markets.
  2. I will not think, “This time, things will be different.”
  3. I will leave the forecasting to the meteorologists.
  4. I will be less impulsive in my decisions.
  5. I will try to control my poor investment behaviors.
  6. I will focus on achieving my personal goals; not beating the benchmark.
  7. I will remain calm in the face of large market swings.
  8. I will choose a path and invest towards the future.
  9. I will be confident.
  10. I will let my “why?” always guide my “how.”

Trust, but Verify

John CoyneJohn Coyne, Vice Chairman

I recently had the opportunity to participate in the 2014 FSI OneVoice conference in Washington, D.C. on a panel centered on issues related to both liquid and traditional alternative investments.  Our nation’s capital proved to be a great venue for the discussion as it called to mind the signature quote that Ronald Reagan used in his discussions with the Soviet Union, “Trust, but verify.”

As the former chief compliance officer here at Brinker Capital, I was impressed by the thoroughness of the due diligence process outlined by the audience of compliance gatekeepers during their discussions about the products circulating through their companies in both the liquid and illiquid space.  It was clear that while they maintain excellent relationships with their product sponsor partners (no, they do not treat them like the evil empire), they have really elevated their game, particularly in understanding the advisor/investor motivations in determining the appropriateness of a particular investment.  It is clear that many eyes are on the investment decision as it winds its way through the Broker/Dealer pipeline.

Financial Services InstituteFSI is providing the type of farsighted stewardship that recognizes that the product manufacturers, custodians, Broker/Dealer’s and the advisors must have a common communion around the needs of the client.  Events like the OneVoice conference demonstrate that their fostering and encouragement of an effective dialogue among all these parties creates the best potential for success.

Taking care of the client…the Gipper would be proud.

What to Do With All Those Receipts?

Sue BerginSue Bergin

There are many little annoyances that an advisor must deal with as a cost of doing business. Tracking expenses is a prime example. Out of necessity, advisors have developed systems for tracking expenses that vary in sophistication. Ranking high on the list is the empty-the-pockets-on-the-assistant’s-desk-and-let-her-deal-with-it system and the stack-the-receipts-in-a-pile-for-a-slow-day-project approach.

While these systems are second nature, the beauty of living in the digital era is that annoying tasks have spawned clever digital solutions.

Such is the case with tracking business expenses. For those who have embraced mobile devices, the days of the crinkled and barely legible receipts can be gone forever. Shoeboxed, Lemon Wallet and ABUKAI Expenses are some of the apps available that make managing receipts painless and efficient. You can download these apps on your Apple, Blackberry or Android device(s), and then simply take photos of your receipts. The expenses are digitally categorized and stored, and in many cases, the data can be imported into a spreadsheet or an accounting program like Quickbooks. With Shoeboxed, you can mail in old receipts and they will make digital copies for you. You can even get multiple “seats” on an ABUKAI account, allowing staff members in your office to contribute to the expense report. Other expenses management software programs, like Expensify and Xpenser, also have mobile applications that result in efficiency gains.

shutterstock_111610157Neat Receipts takes a slightly different approach. They offer a mobile scanner and digital filing system that allows you to scan receipts, business cares and documents. The Neat Receipts software system then identifies, extracts and organizes key information. While these applications might help you to make your practice more efficient, they could also help clients who own businesses. Clients often look to their advisor for tips on how to gain more control over their financial world.

With tax deadlines rapidly approaching, the inefficiencies of traditional approaches are top of mind. Take this opportunity to suggest this small way to remove one of the little annoyances in their lives. You may find that they are quite receptive and appreciative of your efforts.

One For The Muni

Magnotta@AmyLMagnotta, CFA, Brinker Capital

Municipal bonds have delivered very strong positive returns since Meredith Whitney famously predicted hundreds of billions in municipal defaults during a 60 Minutes interview in December 2010. Municipal bonds outperformed taxable bonds (Barclays Aggregate Index) by meaningful margins in both 2011 and 2012.

iShares S&P National AM T-Free Muni Bond Fund

Source: FactSet

Municipal bonds have benefited from a favorable technical environment. New supply over the last few years has been light, and net new supply has been even lower as municipalities have taken advantage of low interest rates to refinance existing debt. While supply has been tight, investor demand for tax-free income has been extremely strong. Investors poured over $50 billion into municipal bond funds in 2012 and added $2.5 billion in the first week of 2013 (Source: ICI). This dynamic has been driving yields lower. The interest rate on 10-year munis fell to 1.73%, the equivalent to a 2.86% taxable yield for earners in the top tax bracket. Similar maturity Treasuries yield 1.83% (Source: Bloomberg, as of 1/15). We expect new supply to be met with continued strong demand from investors.

*Excludes maturities of 13 months or less and private placements.  Source: SIFMA, JPMorgan Asset Management, as of November 2012

*Excludes maturities of 13 months or less and private placements. Source: SIFMA, JPMorgan Asset Management, as of November 2012

While technical factors have helped municipal bonds move higher, the underlying fundamentals of municipalities have also improved.  States, unlike the federal government, must by law balance their budget each fiscal year (except for Vermont).  They have had to make the tough choices and cut spending and programs.  Tax revenues have rebounded, especially in high tax states like California.  Last week California Governor Jerry Brown proposed a budget plan that would leave his state with a surplus in the next fiscal year, even after an increase in education and healthcare spending.  Stable housing prices will also help local municipalities who rely primarily on property tax revenues to operate.

While we think municipal bonds are attractive for investors with taxable assets to invest, the sector is still not without issues.  The tax-exempt status of municipal bonds survived the fiscal cliff deal unscathed, but the government could still see the sector as a potential source of revenue in the future which could weigh on the market.  Underfunded pensions – like Illinois – remain a long-term issue for state and local governments.  Puerto Rico, whose bonds are widely owned by municipal bond managers because of their triple tax exempt status, faces massive debt and significant underfunded pension liabilities and remains a credit risk that could spook the overall muni market.  As a result, in our portfolios we continue to favor active municipal bond strategies that emphasize high quality issues.

You: The Key to Better Investment Returns…and More

Sue BerginSue Bergin

John Hancock’s recent Investor Sentiment Survey demonstrates that over half of investors who use an advisor are confident (56%) that doing so will lead to better investment returns.[1]

How’s that for a confidence boost?

The study also gives us tremendous insights into why clients choose to work with financial advisors and highlights the importance of three factors:

  1. Realistic assessment of one’s own investment management capabilities
  2. Confidence in advisors’ ability to generate better returns than the individual could do themselves and add value to the process
  3. Time constraints

A significant number of participants who work with advisors (47%) do so to obtain a comprehensive financial plan and for validation that their financial decisions are on track.   They tend a need to have a professional’s stamp of approval on their decisions.  This is a moderate showing of confidence in his or her own ability and reveals a willingness to seek and listen to advice.

You Are The Key37% of those working with advisors claim to do so because they lack the knowledge to manage their own investments.  43% of the respondents who do not have an advisor chose to go at it alone because they feel like they can manage comfortably on their own.

36% of the “do-it-yourself” group said that they did not think advisors provided good value for their money.

Working with An Advisor

No Advisor

56% believe working with an advisor will lead to better investment returns 43% have confidence in their own abilities and therefore do not need to work with an advisor
47% seek comprehensive financial planning advice and to validate financial decisions 40% actually enjoy the process
36% acknowledge they couldn’t manage investments on their own 36% lack confidence in advisors
24% don’t have the time

Few people think they could perform surgery on their own knee, but many investors believe they could get comparable results without a professional’s assistance. Technological innovations are only going to fuel that sentiment by making it easier and more fun than ever for the do-it-yourselfers.  The key for advisors is to focus on your unique qualification and the value you add to the relationship.

Instill confidence in your abilities, so theirs are never even considered.

[1] John Hancock Investor Sentiment Survey, January 7, 2013

Find Out What Clients Want to Avoid

Sue BerginSue Bergin

Sometimes the risk tolerance question is difficult for clients because it involves using terminology that is not part of their daily vocabulary.  Next time you ask a client about their tolerance for investment risk, try a different track.   Find out the conditions they want to avoid.

Ask the client what routing preference they use when mapping out a trip.  Do they always choose the fastest route, the shortest distance, most fuel-efficient route, or do they try to avoid highways?

Route selection is based on a number of things. The client might have a strong personal preference that outweighs other factors like current traffic conditions, or whether they are in a rush.  Clients are also willing to accept a certain level of risk if they think that their selection will meet some of their criteria, for example, to save on gas.

Most often, however, the choice is driven by the desire to avoid certain conditions or risks inherent with those paths e.g., traffic, Sunday drivers, scenery, etc.

Routing preferences are one of the key differentiators among global positioning systems on the market today.  Consumers want to customize their maps according to their preferences and the conditions they seek to avoid.

By the same token, investors want to have control over the route that they will take in their financial journey.  They want to make a choice that allows them to avoid certain conditions.

“The fastest routes,” or “shortest distance” route might be too bumpy for their liking.  Similarly, clients might want to avoid the rough terrain that goes along with stock investments.  Instead, they might enjoy a “smoother ride” option, one that is marked by steady progress instead of wild fluctuations in speed.  These are the types of investors who could be most interested in absolute return fund strategies.  Clients interested in a “fuel efficient” option might do so because they want to avoid doing more damage to the environment than necessary. If so, these clients might also be interested in socially responsible investment alternatives.

Avoidance is a powerful motivator in determining what route a client will chose, whether it is on the road to Grandma’s, or the path to financial security.